Strong Economy Propels Corporate Earnings

The latest economic data continued to reveal that economic growth has remained
strong. This should keep pressure on the Federal Reserve to continue to raise
interest rates. While there remains some confusion over what Chairman Bernanke
meant during his Congressional testimony, if the Fed is truly data dependant,
there should be little doubt that the Feb will have to raise rates past 5.0%,
and likely to 5.5% or higher.

Last week, the Commerce Department reported that the nominal GDP grew 6.7%
on a year-over-year basis. Over the past month we have discussed how the economy
is as strong or stronger than in the mid-1990s, but interest rates are not
reflective of this strength. This increase in nominal GDP was stronger than
any quarter during the 1990s. As we have said in the past, historically there
has been a very good correlation between the fed funds target rate and nominal
year-over-year GDP growth. While we doubt fed funds will approach 7%, there
is little evidence to suggest 5.25% will be high enough to attain price stability.

Personal income rose 0.8% in March, much higher than the 0.4% economists forecasted.
Additionally, spending was also stronger than expected, up 0.6% compared to
estimates of 0.4%. Compared to last year, personal income increased 6.0%. This
was the largest year-over-year increase since September. Disposable income
increased 5.5%, the largest year-over-year increase since the end of 2004.
This also marked the twelfth consecutive month of negative savings. Not only
does this raise concern that consumers lack a financial cushion, but should
be proof that consumption is at an unsustainable pace. When the economy starts
to contract, consumer spending could contract dramatically.

Currently, consumer spending is far from contracting. This week, the ICSC
increased its forecasts for April sales from 5.5% - 6.0% to 6.0% - 6.5%. Wal-Mart
announced that its April same store sales rose 6.8%, higher than its forecast
of a gain of 4-6%. This was the largest increase since August 2003. The main
reason for the strong sales was the shift of Easter from March last year to
April this year. Last month, we commented that Wal-Mart's April sales are on
average 600 basis points better in April than March when Easter does shift
months. This year, its March results were up 1.4%, so the increase was weaker
than its historical results. American Eagle Outfitters reported that April
same store sales increased 19.0%, compared to analysts' estimates of 9.9%.

The ISM survey rose 2.1 points in April to 57.3, the highest since November
last year. Most of the strength came from the production component, which rose
2.9 points, the highest since September. New orders decelerated, dropping 0.8
points to 57.6. Also notable were the increases in employment (up 3.3 points
to 55.8) and a five point increase in prices to 71.5. The non-manufacturing
ISM rose 2.5 points to 63 in April. This was the highest level since August.
The largest increase was in price, which soared ten points to 70.5 and was
the highest since November last year. New orders rose 5.1 points to 64.6, tying
for the second highest level since the survey started in 1997. Employment also
ticked up by 1.9 points to 56.5, giving more support that the employment market
remained strong in April.

Construction spending increased 9.6% in March compared to last year. This
was the fastest gain since April 2005. Residential construction rose 10.1%
compared to last year, which was an acceleration from the 7.9% growth recorded
in February. This should prove as a reminder that the recent slowdown in housing
has been confined to new home orders from the homebuilders. Current construction
remains strong and existing home sales have plateaued at a high level. Nonresidential
construction increased 9.0%, a touch weaker than last month, but so far this
year, it has risen 9.9%.

Domestic automakers continued to lose market share in April. General Motors
reported that sales dropped 11% in April. Truck sales were helped by new models
but still fell 2.1% overall. Sales of cars plunged 21%. Ford's results were
slightly better, down 6.6%. Its car sales actually increased 8.3%, but truck
sales fell 14.5%. Chrysler's sales have generally held up better than the other
domestic automakers. This was not true in April when sales fell 8%. The Japanese
automakers had a much better month. Toyota sold 4.5% more cars in April than
last year, while Honda's sales were up 2.6%.. Toyota's sales surpassed Chrysler
to grab third place in market share. Nissan's sales were the weakest of the
major imports, falling 5.3%. Higher gas prices appear to have caused car buyers
to shift to cars from trucks and SUVs. A recent Harris Interactive and Kelly
Blue Book poll found that higher gasoline prices have caused 62% of car buyers
to rethink what vehicle they will purchase. Nineteen percent said they would
consider a small sedan, compared to 15% last month.

Over 400 of the S&P 500 companies have reported first quarter earnings.
The strong economy has provided a strong tailwind that has helped companies
post earnings that were higher than Wall Street forecasted. Of the S&P
500 companies that have reported earnings, 68.6% have exceeded Wall Street
estimates, and growth now appears to be close to 14%. At the end of the quarter,
earnings were expected to increase only 11.2%. Perhaps more important is the
outlook for the second quarter. Only 51% of Q2 preannouncement of results have
been negative, compared to 56% last year and 64% last quarter. Earnings growth
estimates have ticked up slightly during April and call for 11.3% growth.

Hovnanian Enterprises announced that its first quarter earnings would be lower
than analysts' forecasts. Earnings per share for the first quarter are expected
to be $1.40 to $1.50. Analysts were expecting earnings per share to be $1.63.
Moreover, the company said that full year earnings would be $7.20 to $7.40,
compared to its previous guidance of $8.05 to $8.40. Last year, Hovanian earned
$7.21 per share. In explaining the reason for the revised outlook the company
said it was due to, "continuing production delays in several markets that have
postponed deliveries, a slower recent sales pace, higher cancellation rates,
more pronounced used of concessions and incentives, and higher material price
increases." Additionally, Hovanian said that part of the lower second quarter
earnings is due to the company writing off $5 million worth of option deposits
relating to its land it controlled. Last week, Centex said it took a charge
of 14 cents per share due to writing off options used to control land.